UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934

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Watson Pharmaceuticals, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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April 4, 2008

 

To Our Stockholders:

 

You are cordially invited to attend the 2008 Annual Meeting of Stockholders of Watson Pharmaceuticals, Inc. The meeting will be held at the Westin South Coast Plaza Hotel located at 686 Anton Boulevard, Costa Mesa, California on May 9, 2008 at 9:00 a.m. local time.

 

The Secretary’s Notice of Meeting and the proxy statement, which follow, describe the matters to come before the meeting. During the meeting, we will also review the activities of the past year and items of general interest about the company.

 

We appreciate your continued interest and support as a Watson Pharmaceuticals, Inc. stockholder. We hope that you will be able to attend the meeting in person and we look forward to seeing you. For your convenience, we are also offering a webcast of the meeting. The webcast will be available by accessing www.watson.com shortly before the meeting time. You may also listen to a replay of the webcast on our website beginning May 10, 2008.

 

Whether or not you plan to attend the annual meeting, please vote your shares: (i) by calling the toll-free telephone number on your proxy card, (ii) via the Internet, by following the instructions on your proxy card, or (iii) by marking, dating and signing the enclosed proxy card and returning it in the accompanying postage paid envelope as quickly as possible.

 

Sincerely,

 

Paul M. Bisaro

President and Chief Executive Officer

WATSON PHARMACEUTICALS, INC.
311 Bonnie Circle
Corona, California 92880

 

 

 

2008 ANNUAL MEETING OF STOCKHOLDERS
May 9, 2008

 

 

Notice of Annual Meeting of Stockholders:

 

You are hereby notified that the 2008 Annual Meeting of Stockholders (the “Meeting”) of Watson Pharmaceuticals, Inc. (the “Company”) will be held at the Westin South Coast Plaza Hotel, located at 686 Anton Boulevard, Costa Mesa, California at 9:00 a.m. local time, on May 9, 2008, for the following purposes:

 

1. To elect four (4) directors to hold office until the 2011 Annual Meeting or until their respective successors are duly elected and qualified.

 

2. To ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2008.

 

3. To transact such other business as may properly come before the meeting or any adjournment thereof.

 

The Board of Directors has fixed the close of business on March 21, 2008 as the record date for the determination of stockholders entitled to notice of and to vote at the Meeting. Only stockholders of record at the close of business on March 21, 2008 will be entitled to notice of and to vote at the Meeting or any adjournment thereof. Your attention is directed to the attached proxy statement for more complete information regarding the matters to be acted upon at the Meeting.

 

Whether or not you plan to attend the annual meeting, please vote your shares: (i) by calling the toll-free telephone number on your proxy card, (ii) via the Internet, by following the instructions on your proxy card, or (iii) by marking, dating and signing the enclosed proxy card and returning it in the accompanying postage paid envelope as quickly as possible.

 

By Order of the Board of Directors

 

David A. Buchen,

Secretary

 

Corona, California

April 4, 2008

WATSON PHARMACEUTICALS, INC.
311 Bonnie Circle
Corona, California 92880

 

2008 ANNUAL MEETING OF STOCKHOLDERS
May 9, 2008

 

 

PROXY STATEMENT

 

 

GENERAL

 

This proxy statement and the accompanying proxy are furnished to stockholders of Watson Pharmaceuticals, Inc. (“Watson,” “we,” “us” and “our”) in connection with the solicitation of proxies by our Board of Directors for use at the 2008 Annual Meeting of Stockholders (the “Meeting”) to be held at the Westin South Coast Plaza Hotel, located at 686 Anton Boulevard, Costa Mesa, California at 9:00 a.m. local time on May 9, 2008 for the purposes set forth in the accompanying Notice of Annual Stockholders’ Meeting. This proxy statement, the enclosed form of proxy, and our 2007 Annual Report to Stockholders are being mailed to stockholders on or about April 7, 2008.

 

Stockholders of record at the close of business on March 21, 2008 (the “record date”) are entitled to notice of and to vote at the Meeting. On such date, there were outstanding 104,396,571 shares of our common stock, par value $.0033 per share. In deciding all questions, each holder of common stock shall be entitled to one vote, in person or by proxy, for each share held on the record date.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on May 9, 2008.

 

This proxy statement and our 2007 annual report to stockholders and the means to vote by Internet are available on our website at www.watson.com/proxy and at www.proxyvote.com. Our website contains the following documents: the notice of the annual meeting, this proxy statement and proxy card sample, the 2007 annual report to stockholders. You are encouraged to access and review all of the important information contained in the proxy materials before voting.

 

VOTING RIGHTS AND SOLICITATION OF PROXIES

 

Voting by Proxy or in Person

 

The method of voting by proxy differs for shares held as a record holder and shares held in “street name.” If you hold your shares of common stock as a record holder, you may vote by completing, dating and signing the enclosed proxy card and promptly returning it in the enclosed, preaddressed, postage paid envelope or otherwise mailing it to us, or by submitting a proxy over the Internet or by telephone by following the instructions on the enclosed proxy card. You may also vote by attending the annual meeting and voting in person.

 

If you hold your shares of common stock in street name, which means your shares are held of record by a broker, bank or nominee, you will receive instructions from your broker, bank or other nominee that you must follow in order to vote your shares. Your broker, bank or nominee may allow you to deliver your voting instructions over the Internet or by telephone. Please see the voting instructions from your broker, bank or nominee that accompany this proxy statement. If you hold your shares in street name, you will need to obtain a legal proxy from your bank, broker or nominee in order for you to vote in person at the annual meeting.

 

Your vote is very important. Accordingly, please complete, sign and return the enclosed proxy card or voting instruction card whether or not you plan to attend the annual meeting in person. You should vote your proxy even if you plan to attend the annual meeting. Voting instructions are included on your proxy card. If

you properly give your proxy and submit it to us in time to vote, one of the individuals named as your proxy will vote your shares as you have directed.

 

Voting by Internet or Telephone

 

If your shares are registered in the name of a bank or brokerage firm, you may be eligible to vote your shares electronically over the Internet or by telephone. A large number of banks and brokerage firms are participating in the Broadridge Investor Communications Solutions, Inc. (formerly ADP Investor Communication Services) online program. This program provides eligible stockholders who receive a paper copy of the Annual Report and proxy statement the opportunity to vote via the Internet or by telephone. If your bank or brokerage firm is participating in ADP’s program, your voting form will provide instructions. The Internet and telephone voting facilities will close at 11:59 p.m. Eastern Time on May 8, 2008. Stockholders who vote through the Internet or telephone should be aware that they may incur costs to access the Internet, such as usage charges from telephone companies or Internet service providers, and that these costs must be borne by the stockholder. Stockholders who vote by Internet or telephone need not return a proxy card by mail. If your voting form does not reference Internet or telephone information, please complete and return the paper Proxy in the self-addressed postage paid envelope provided.

 

Revocation of Proxy

 

A stockholder of record may revoke his or her proxy in one of four ways at any time before the proxy is voted at the Meeting.

 

1. The stockholder may send a notice in writing, with a date later than the date of the proxy, to our Secretary revoking the proxy.

 

2. The stockholder may attend the Meeting and vote in person. Attendance at the Meeting will not, by itself, revoke a proxy.

 

3. The stockholder may execute a proxy, relating to the same shares, with a later date and deliver it to our Secretary before the voting at the Meeting.

 

4. The stockholder may submit another proxy by telephone or the Internet (your latest telephone or Internet voting instructions will be followed).

 

Any such notices and new proxies should be sent to Watson Pharmaceuticals, Inc., Corporate Secretary, 311 Bonnie Circle, Corona, California 92880.

 

Persons who hold their shares through a bank, brokerage firm or other nominee, may revoke their proxy by following the requirements of their bank or broker, or may vote in person at the Meeting by obtaining a legal proxy from their bank or broker.

 

Solicitation of Proxies

 

All expenses incurred in the solicitation of proxies will be borne by us. In addition to the use of the mail, proxies may be solicited on our behalf by our directors, officers and employees, who will receive no additional consideration for such services. Brokers, custodians, nominees and other stockholders of record will forward copies of the proxy statement and other soliciting materials to persons for whom they hold shares of our common stock and to request authority for the exercise of proxies. In such cases, we, upon the request of the stockholders of record, will reimburse brokers, custodians and nominees for their reasonable expenses.

 

Quorum and Voting

 

At the close of business on March 21, 2008, 104,396,571 shares of our common stock were outstanding and entitled to vote. Votes cast by proxy (including through the Internet or by telephone) or in person at the Meeting will be tabulated by the election inspector appointed for the Meeting who will determine whether or not a quorum is present. The presence, in person or by proxy, of the holders of a majority of our common

stock outstanding and entitled to vote at a meeting of stockholders is necessary in order to constitute a quorum for the conduct of business at the Meeting.

 

Brokers or other nominees who hold shares of common stock in “street name” for a beneficial owner of those shares typically have the authority to vote in their discretion on “routine” proposals when they have not received instructions from beneficial owners. However, brokers are not allowed to exercise their voting discretion with respect to the approval of matters which the New York Stock Exchange (the “NYSE”) determines to be “non-routine,” without specific instructions from the beneficial owner. If a proxy is received but marked abstention or if a broker indicates on the proxy that it does not have discretionary authority as to certain shares to vote on a particular matter and has not been instructed on how to vote (i.e. “broker non-votes”), those shares will be considered as present and entitled to vote for purposes of determining the presence of a quorum. The election of directors and ratification of accountants are generally considered to be routine proposals.

 

A properly executed proxy that is received before the polls are closed at the Meeting and that is not revoked will be voted in the manner directed by the stockholder submitting the proxy. If no direction is made, such proxy will be voted:

 

 

As of the date of this proxy statement, the Board of Directors knows of no other business that will be presented for consideration at the Meeting. However, if other proper matters are presented at the Meeting, it is the intention of the proxy holders named in the enclosed form of proxy to take such actions as shall be in accordance with their best judgment.

 

The enclosed proxy gives each of Paul M. Bisaro and David A. Buchen discretionary authority to vote your shares in accordance with his best judgment with respect to all additional matters that might come before the annual meeting.

 

“Householding”

 

In an effort to reduce printing costs and postage fees, we have adopted a practice approved by the Securities and Exchange Commission (“SEC”) called “householding.” Under this practice, stockholders of record who have the same address and last name and do not participate in the electronic delivery of proxy materials will receive only one copy of our proxy materials, unless one or more of these stockholders notifies us that he or she wishes to continue receiving individual copies. Stockholders who participate in householding will continue to receive separate proxy cards. If you share an address with another stockholder and prefer to receive separate copies of our proxy materials, please mail your request to Watson Pharmaceuticals, Inc., Investor Relations, 311 Bonnie Circle, Corona, California 92880.

 

Information on our website, other than our proxy statement and form of Proxy, is not part of the proxy soliciting material and is not incorporated into this proxy statement by reference.

 

Assistance

 

If you need assistance in completing your proxy card or have questions regarding the annual meeting, please contact our investor relations department at 1-951-493-5563 or info@watson.com or write to: Investor Relations, at Watson Pharmaceuticals, Inc., 311 Bonnie Circle, Corona, California 92880.

 

PROPOSAL NO. 1 — ELECTION OF DIRECTORS

 

Under our bylaws the Board of Directors must consist of between seven and fifteen directors, with the exact number determined by the Board of Directors. The Board of Directors has set the current number of authorized directors at ten. Our articles of incorporation provide that the Board of Directors will be divided into three classes. One class is elected each year for a three-year term, expiring at our annual meeting of stockholders. At the Meeting, four directors, who will comprise the Class I directors, are to be elected to serve until the 2011 annual meeting or until their successors are duly elected and qualified.

 

Based upon the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors has nominated (1) Michael J. Fedida, Albert F. Hummel and Catherine M. Klema, each of whom was elected by the stockholders to their present term, for re-election as Class I directors and (2) Paul M. Bisaro, who was appointed to the Board of Directors on September 4, 2007 in connection with his appointment as our President and Chief Executive Officer, for election as a Class I director. Our Class II directors, Ronald R. Taylor, Andrew L. Turner and Jack Michelson, are scheduled to serve as directors until the 2009 Annual Meeting. Our Class III directors, Allen Chao, Ph.D., Michel J. Feldman and Fred G. Weiss, are scheduled to serve as directors until the 2010 Annual Meeting. There are no vacant positions on the Board of Directors.

 

Information about the nominees for director and our directors, whose term of office will continue after the Meeting, is set forth in the following paragraphs and is based on information provided to us as of March 24, 2008.

 

Class I Director Nominees for Election at the Meeting:

 

 

Paul M. Bisaro, age 47, was appointed as our President and Chief Executive Officer and to our Board of Directors effective September 4, 2007. Prior to joining us, Mr. Bisaro was President and Chief Operating Officer of Barr Pharmaceuticals, Inc., a global specialty pharmaceutical company (“Barr”), from 1999 to 2007. Between 1992 and 1999, Mr. Bisaro served as General Counsel of Barr and from 1997 to 1999 served in various additional capacities including Senior Vice President — Strategic Business Development of Barr. Prior to joining Barr, he was associated with the law firm Winston & Strawn and a predecessor firm, Bishop, Cook, Purcell and Reynolds from 1989 to 1992. Mr. Bisaro received his undergraduate degree in General Studies from the University of Michigan in 1983 and a Juris Doctor from Catholic University of America in Washington, D.C. in 1989.

 

 

Michael J. Fedida, age 61, a registered pharmacist, has served for the past twenty-six years as an officer and director of several retail pharmacies wholly or partially owned by him, including J&J Saint Michael’s Pharmacy from 2005 to present; J&J Pharmacy and Classic Pharmacy from 1987 to present; Perfect Pharmacy from 1980 to 2000; and Phoster Pharmacy from 1985 to 2000. Mr. Fedida served on the Board of Directors of Circa Pharmaceuticals, Inc. (“Circa”), from 1988 to 1995, at which time Circa was acquired by us. Mr. Fedida was a Director of Bradley Pharmaceuticals, Inc., a specialty pharmaceutical company, from April 2004 to February 21, 2008.

 

 

Albert F. Hummel, age 63, has been our director since March 1986, except for a period from July 1991 to October 1991. Mr. Hummel has been President of Pentech Pharmaceuticals, Inc., a development stage pharmaceutical company, since July 1998. Since November 2005, Mr. Hummel has been a director for Obagi Medical Products, Inc., a specialty pharmaceutical company focused on the aesthetic and therapeutic skin health markets. Additionally, Mr. Hummel served as a partner in Affordable Residential Communities, a property management firm, from January 1994 through March 2006.

 

 

Catherine M. Klema, age 49, has been our director since March 2004. Ms. Klema is currently President of Nettleton Advisors LLC, a consulting firm established by Ms. Klema in 2001. Ms. Klema served as

Managing Director, Healthcare Investment Banking, at SG Cowen Securities from 1997 to 2001. While at SG Cowen, Ms. Klema had advised us on investment banking matters. Ms. Klema also served as Managing Director, Healthcare Investment Banking, at Furman Selz LLC from 1994 until 1997, and was employed by Lehman Brothers from 1987 until 1994. Ms. Klema has been a director of Pharmaceutical Product Development, Inc., a global contract research organization, since 2000.

 

The Board of Directors knows of no reason why any of the foregoing nominees will be unavailable to serve, but in the event of any such unavailability, the proxies received will be voted for such substitute nominees as the Board of Directors may recommend.

 

Required Vote for Election of Directors

 

Directors will be elected by a favorable vote of a plurality of the shares of our common stock present and entitled to vote, in person or by proxy, at the Meeting. Thus, the three nominees receiving the largest number of votes will be elected. Accordingly, abstentions will not affect the outcome of the election of directors. In addition, the election of directors is a matter on which a broker or other nominee generally has discretionary voting authority, and thus broker non-votes are not expected to result from this proposal.

 

The Board of Directors unanimously recommends a vote FOR the election of all four nominees.

 

Class II Directors whose Terms Expire at the 2009 Meeting:

 

 

CORPORATE GOVERNANCE

 

Corporate Governance Guidelines and Code of Conduct

 

Our Board of Directors has adopted Corporate Governance Guidelines. These guidelines address the make-up and functioning of the Board of Directors and its committees, which include determining director independence, criteria for Board membership, and authority to retain independent advisors.

 

Our Board of Directors has also adopted a Code of Conduct which applies to all of our Board members and all of our officers and employees. The code sets forth and summarizes certain of our policies related to legal compliance and honest and ethical business practices. The code is intended to comply with the standards set forth in Section 303A.10 of the NYSE’s Listed Company Manual and SEC rules and regulations. Any amendments to, or waivers from, provisions of the Code of Conduct that apply to our directors or executive officers, including our Chief Executive Officer and Chief Financial Officer and persons performing similar functions, will be promptly posted on our website at http://www.watson.com.

 

You can find links to our Corporate Governance Guidelines and our Code of Conduct under the Investors section of our website at http://www.watson.com. Copies of these materials are available to stockholders without charge upon request sent to Investor Relations at Watson Pharmaceuticals, Inc., 311 Bonnie Circle, Corona, CA 92880.

 

Director Independence

 

On an annual basis our Board of Directors reviews the independence of all directors and affirmatively makes a determination as to the independence of each director. For a director to be considered independent, the Board must determine that the director does not have any direct or indirect material relationship with Watson. To assist in making this determination, the Board has adopted independence guidelines which are designed to conform to, or be more exacting than, the independence requirements set forth in the listing standards of the NYSE. You may find these guidelines on our website at www.watson.com. In addition to applying these guidelines, the Board considers any and all additional relevant facts and circumstances in making an independence determination.

 

Our Board has determined that at least a majority of its directors has no direct or indirect material relationship with us (other than as our director) and such directors are independent within the meaning of the independence standards promulgated by the SEC and the NYSE. Specifically, on February 26, 2008, the Board determined, based on our Director Independence Standards and the NYSE standards for independence, that Michael Fedida, Michel Feldman, Albert Hummel, Catherine Klema, Jack Michelson, Ronald Taylor,

Andrew Turner and Fred Weiss, or eight out of our ten directors, have no material relationship with us and are independent directors. Dr. Chao was determined to be not independent, because (a) he was our President and Chief Executive Officer through September 2007 and (b) he is the brother-in-law of Dr. David Hsia, our Senior Vice President, Scientific Affairs. Mr. Bisaro was determined to be not independent, because he is our President and Chief Executive Officer.

 

The relationships and transactions reviewed by the Board included the following:

 

(i) Mr. Fedida’s ownership of pharmacies that from time to time purchase pharmaceuticals from Anda, Inc., a wholesaler distributor we acquired in 2006,

 

(ii) Mr. Feldman’s partnership with Seyfarth Shaw LLP, a law firm which has provided services for us within the past three years,

 

(iii) Ms. Klema’s directorship with Pharmaceutical Product Development, Inc., a contract research organization that has provided services for us within the past three years, and

 

(iv) Mr. Taylor’s directorship of 3e Company, a privately-held compliance information services company that has provided services for us within the past three years.

 

The Board has determined that these transactions were made in the ordinary course, were below the thresholds set forth in our director independence standards and did not affect the independence of the directors involved.

 

BOARD OF DIRECTORS AND COMMITTEES

 

Executive Sessions

 

We schedule regular executive sessions in which non-management directors meet without management participation. The Chairman of the Nominating and Corporate Governance Committee presides at these meetings.

 

Communications with the Board of Directors

 

Any interested party, including any stockholder, wishing to contact the Board of Directors, the presiding director of the non-management director meetings, or any other individual director may do so in writing by sending a letter to:

 

Chairman, Nominating and Corporate Governance Committee

c/o Corporate Secretary

Watson Pharmaceuticals, Inc.

311 Bonnie Circle

Corona, CA 92880

 

Our Corporate Secretary reviews all such written correspondence and regularly forwards to the Board of Directors a summary of all correspondence and copies of correspondence that, in the opinion of the Corporate Secretary, deal with the functions of the Board of Directors or its committees, or that the Corporate Secretary otherwise determines requires Board attention.

 

Director Nomination Process

 

The Nominating and Corporate Governance Committee considers director candidates from diverse sources, including suggestions from stockholders. From time to time, the Nominating and Corporate Governance Committee may engage a third party for a fee to assist in identifying potential director candidates. The Nominating and Corporate Governance Committee looks for candidates who (a) bring not only direct experience, but also a variety of experience and background, both professionally and personally, (b) will represent the balanced, best interests of the stockholders as a whole rather than special interest groups or constituencies, and (c) have a reputation for integrity and satisfy the independence requirements of the NYSE, our Director Independence Standards and applicable law. The Nominating and Corporate Governance

Committee’s goal is to have a diverse, balanced and engaged board whose members possess the skills and background necessary to maximize stockholder value in a manner consistent with all legal requirements and the highest ethical standards. The Nominating and Corporate Governance Committee’s Charter and our Corporate Governance Guidelines, which are published on our website at http://www.watson.com under the Investors section, set forth in further detail the criteria that guide the Committee in assessing potential candidates for the Board of Directors.

 

In determining whether to recommend a director for re-election, the Nominating and Corporate Governance Committee considers the director’s contributions to the Board and the Committees on which such person serves, participation in and attendance at meetings, and any changes in employment status, health, community activity or other factors may affect the director’s continuing contributions to the Board. The Nominating and Corporate Governance Committee evaluates each individual in the context of the Board as a whole, with the objective of recommending a group that can best perpetuate the success of the business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.

 

The Nominating and Corporate Governance Committee initially evaluates a candidate for nomination to the Board based on information supplied by the party recommending the candidate and any additional public information that may be available. If the initial evaluation is favorable, the Nominating and Corporate Governance Committee gathers additional information on the candidate’s qualifications, availability, probable level of interest and any potential conflicts of interest. If the subsequent evaluation is also favorable, the Nominating and Corporate Governance Committee contacts the candidate directly to better determine each party’s level of interest in pursuing the candidacy and checks the candidate’s references. If, after discussions and meetings, the candidate and the Nominating and Corporate Governance Committee establish a mutual interest in pursuing the candidacy, the Committee makes a final recommendation to the Board to nominate the candidate for election by the stockholders (or to select the candidate to fill a vacancy, as applicable). The Nominating and Corporate Governance Committee employs the same process for evaluating all candidates, including those properly submitted by stockholders and will consider stockholder recommendations of candidates on the same basis as it considers all other candidates.

 

Stockholders wishing to recommend a director candidate for consideration by the Nominating and Corporate Governance Committee may do so by sending the candidate’s name, biographical information and qualifications, together with a consent in writing signed by the recommended nominee that he or she is willing to be considered as a nominee and, if nominated and elected, he or she will serve as a director, to the Chair of the Nominating and Corporate Governance Committee in care of the Corporate Secretary, Watson Pharmaceuticals, Inc., 311 Bonnie Circle, Corona, California 92880. The submission of a recommendation by a stockholder in compliance with these procedures does not guarantee the selection of the stockholder’s candidate or the inclusion of the candidate in our proxy statement; however, the Nominating and Corporate Governance Committee will consider any such candidate in accordance with the procedures and guidelines as described above and as set forth in the Charter of our Nominating and Corporate Governance Committee and in our Corporate Governance Guidelines.

 

Board Meetings

 

During the fiscal year ended December 31, 2007, the Board of Directors held eighteen meetings and executed two unanimous written consents in lieu of meetings. With the exception of Paul Bisaro, who joined us in September 2007, each director attended at least 75% of the combined total of (i) all Board of Directors and (ii) all meetings of Committees of which the director was a member. We do not have a policy with regard to board members’ attendance at annual meetings. With the exception of Mr. Bisaro, all members of the Board attended our 2007 Annual Meeting of Stockholders. Mr. Bisaro was not employed by, or a director of, Watson at the time of the 2007 Annual Meeting of Stockholders.

 

Committees

 

The Board of Directors has created four standing committees: the Audit Committee, the Compensation Committee, the Nominating and Corporate Governance Committee and the Regulatory Compliance

Committee. The Board of Directors has adopted a charter for each of the four committees. The charters for each committee and other materials related to corporate governance are available under the Investors section of our website at http://www.watson.com. A copy is also available to stockholders upon request sent to Investor Relations at Watson Pharmaceuticals, Inc., 311 Bonnie Circle, Corona, CA 92880.

 

The Audit Committee

 

We have an Audit Committee composed of Catherine M. Klema, Ronald R. Taylor, Andrew L. Turner and Fred G. Weiss. Each were members of the Audit Committee throughout fiscal year 2007. Mr. Weiss serves as the Chairman of the Audit Committee. All of the members of the Audit Committee have been determined by the Board of Directors to be “independent” and meet the audit committee independence requirements of the NYSE listing standards and SEC Rule 10A-3. The Board of Directors has determined that all of the current members of the Audit Committee qualify as “audit committee financial experts” within the meaning of the SEC rules, and are financially literate as required under the NYSE listing standards. The functions of the Audit Committee and its activities during fiscal 2007 are described below under the heading “Report of the Audit Committee.” The Audit Committee is directly responsible for the engagement, compensation and oversight of the work of PricewaterhouseCoopers LLP (including resolution of disagreements between management and PricewaterhouseCoopers LLP regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. During the fiscal year ended December 31, 2007, the Audit Committee met five times and executed three unanimous written consents in lieu of a meeting.

 

The Board of Directors and Audit Committee will take appropriate action, including reviewing and reassessing the adequacy of the Audit Committee charter annually and periodically, as appropriate, and as conditions dictate.

 

The Compensation Committee

 

We have a Compensation Committee composed of Catherine M. Klema, Ronald R. Taylor and Fred G. Weiss. Each were members of the Audit Committee throughout fiscal year 2007. Mr. Taylor serves as the Chairman of the Compensation Committee. All of the members of the Compensation Committee have been determined by the Board of Directors to be “independent” and meet the independence requirements of the NYSE listing standards. Our Board has determined that all current Compensation Committee members qualify as “non-employee directors” within the meaning of Section 16 of the Exchange Act and as “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code. The primary purpose of the Compensation Committee is to review, approve and evaluate director and senior executive compensation plans, policies and programs for us. The Compensation Committee has engaged Towers Perrin, an independent compensation consulting firm, to advise the Compensation Committee on an ongoing basis. Towers Perrin reports directly to the Compensation Committee and the Compensation Committee retains the right to terminate or replace the consultant at any time. Towers Perrin conducts an annual review of our total compensation program for our executive officers and advises the Compensation Committee on such compensation matters as requested by the Compensation Committee. Additional information on the Compensation Committee’s processes and procedures for consideration of executive compensation, including the role of our chief executive officer, are addressed in the Compensation Discussion and Analysis on page 10. The Compensation Committee met four times and executed two unanimous written consents in lieu of meetings during the fiscal year ended December 31, 2007.

 

The Nominating and Corporate Governance Committee

 

We have a Nominating and Corporate Governance Committee composed of Ronald R. Taylor, Andrew L. Turner and Fred G. Weiss. Each were members of the Audit Committee throughout fiscal year 2007. Mr. Turner serves as the Chairman of the Nominating and Corporate Governance Committee. All of the members of the Nominating and Corporate Governance Committee have been determined by the Board of Directors to be “independent” and meet the independence requirements of the NYSE listing standards. The key functions of the Nominating and Corporate Governance Committee are to identify and present qualified candidates to the Board of Directors for election or re-election as directors of the Board and Board of

Directors’ committees, ensure that the size and composition of the Board of Directors, its committees, and our Charter and Bylaws are structured in a way that best serves our practices and objectives, develop and recommend to the Board of Directors a set of corporate governance guidelines and principles and periodically review and recommend changes to such guidelines and principles as deemed appropriate, and oversee the evaluation of the Board of Directors and senior management. The Nominating and Corporate Governance Committee met two times during the fiscal year ended December 31, 2007.

 

The Regulatory Compliance Committee

 

We have a Regulatory Compliance Committee composed of Michael J. Fedida, Albert F. Hummel, Michel J. Feldman and Jack Michelson. Mr. Michelson serves as the Chairman of the Regulatory Compliance Committee. The primary purpose of the Regulatory Compliance Committee is to assist the Board of Directors with the Board’s oversight responsibilities regarding our compliance with applicable regulatory requirements related to product safety and quality and environmental, health and safety matters. The Regulatory Compliance Committee met three times during the fiscal year ended December 31, 2007.

 

EXECUTIVE COMPENSATION

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Overview of Compensation Program

 

The Compensation Committee (for purposes of this analysis, the “Committee”) of our Board of Directors is responsible for establishing, implementing and continually monitoring our adherence with our compensation philosophy for our executive officers, including Paul M. Bisaro, our chief executive officer. The Committee ensures that the total compensation paid to our executive officers is fair, reasonable and competitive.

 

Throughout this proxy statement, the individuals who served as our chief executive officer and chief financial officer during fiscal 2007, as well as three other executives are referred to as the “named executive officers.” Our named executive officers consists of Paul M. Bisaro, our President and Chief Executive Officer, Allen Chao, Ph.D., our Chairman of the Board, and former President and Chief Executive Officer, Mark W. Durand, our Senior Vice President and Chief Financial Officer, R. Todd Joyce, our Vice President, Corporate Controller and Treasurer and former interim Principal Financial Officer, Thomas R. Russillo, our Executive Vice President and President, Generics Division, David A. Buchen, our Senior Vice President, General Counsel and Secretary, and Edward F. Heimers, our Executive Vice President, and President, Brand Division.

 

Dr. Chao resigned from his position as President and Chief Executive Officer, effective September 4, 2007. At such time, Dr. Chao assumed the role of Executive Chairman and served in that capacity until December 31, 2007. Dr. Chao’s current term as a member of the Board continues until the Annual Meeting of Shareholders in 2010. Mr. Bisaro, succeeded Dr. Chao as our President and Chief Executive Officer effective as of September 4, 2007. Mr. Bisaro was also appointed as a member of the Board. Mr. Durand was appointed to the position of Senior Vice President and Chief Financial Officer effective as of November 26, 2007. Prior to this time, Mr. Joyce served as our Interim Principal Financial Officer.

 

Compensation Philosophy and Objectives

 

The Committee believes that its primary objectives with respect to named executive officer compensation are to:

 

 

To these ends the Committee believes that the most effective executive compensation program is one that (i) links a significant portion of an executive’s total compensation to the achievement of specific individual and corporate performance goals, including annual and long-term strategic goals and (ii) provides such compensation in a mix of both cash and equity-based compensation such that our executives continue to have the creation of short- and long-term stockholder value as a primary objective. The Committee evaluates individual, departmental, segment and corporate performance to determine the proper mix of executive total compensation with the goal of setting executive total compensation at levels the Committee believes are competitive relative to the total compensation paid to similarly situated executives of our peer companies.

 

As a result of our compensation objectives outlined above we allocate a significant percentage of our total compensation to annual cash incentives and long-term equity incentives. We have no pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. Rather, the Committee continually reviews many factors, as discussed more fully below, to determine the appropriate level and mix of incentive compensation.

 

Role of Executive Officers in Compensation Decisions

 

On an annual basis, in concert with our chief executive officer, our named executive officers engage in a process whereby they each set individual, departmental and company-wide goals for the year to come. Following the completion of our fiscal year, our named executive officers are formally required to assess whether these goals were achieved and set percentile values to express the extent to which the named executive officer believes his or her goals were met. Our chief executive officer reviews and discusses these self-assessments with each of our named executive officers and, with the assistance of our human resources department, makes recommendations to the Committee concerning compensation of the named executive officers. While the Committee considers these recommendations in determining base salaries, adjustments to base salaries, cash incentive awards and equity-based awards for our named executive officers it may, in its discretion, modify any such recommendations. Our Senior Vice President, Human Resources, also works closely with the Committee and management to ensure that the Committee is provided with appropriate information upon which to base its decisions and communicate those decisions to management for implementation.

 

Compensation Consultant

 

The Committee has engaged Towers Perrin, an independent global professional services consulting firm, to advise the committee on matters related to chief executive officer and other executive compensation. In this capacity, Towers Perrin conducts an annual benchmark review of our compensation program for our named executive officers and provides the Committee with relevant market data and structuring alternatives to consider when making compensation decisions.

 

Working with Towers Perrin, the Committee compares the elements of our total compensation program against programs provided for similarly situated executives at peer companies, as discussed more fully below. The Committee generally assesses the competitiveness of our target total direct compensation (salary, bonus and equity) for our named executive officers by comparing these targets with the 50^th percentile of total direct compensation paid to similarly situated executives of our peer companies.

 

In February and June 2007 Towers Perrin conducted 2006 competitive pay assessments, to assist us in determining competitive compensation for fiscal 2007. In February 2007, Towers Perrin conducted a pay assessment of our chief executive officer’s compensation using peer group proxy data. For the purposes of this assessment, the peer group companies considered by Towers Perrin and the Committee consisted of:

 

Based on its assessment, Towers Perrin found that for 2006 our chief executive officer’s (a) base salary was within the competitive range at market 50^th percentile, (b) target cash compensation was above the competitive range at market 50^th percentile, (c) actual total cash compensation was below the competitive range at market 50^th percentile, (d) target total direct compensation was within the competitive range at market 50^th percentile and (e) actual total direct compensation was below the competitive range at market 50^th percentile.

 

Mr. Bisaro’s compensation was not considered in the above analysis as he joined us after Towers Perrin conducted its competitive pay assessments.

 

In June 2007, Towers Perrin conducted a competitive pay assessment of the compensation of our other named executive using three sources of competitive pay data in its analysis presented to the Committee: (i) a pharmaceutical industry database including many of the major pharmaceutical and biotechnology companies; (ii) a 2005 survey cut of companies with over $1 billion in annual revenues and (iii) benchmarks from proxy-reported positions in 9 selected proxy peer group companies.

 

For the purposes of this assessment, the peer group companies considered by Towers Perrin and the Committee consisted of:

 

 

We removed Amgen from the proxy comparisons due to revenue and market capitalization differences. Certain members of the peer group reviewed are considered to be very similar to us in terms of market capitalization, number of employees, and overall prospects for short- and long-term growth. The compensation paid by these peer group companies to their executive officers is given greater weight in setting base salaries for our named executive officers. The Committee does not rely exclusively on statistical compilations and may vary on a case-by-case basis from our compensation target objectives as dictated by the experience of the individual and market factors.

 

In assessing competitiveness, Towers generally considered a named executive officer’s compensation to be within the competitive range relative to market if (a) base salary is within plus or minus 10% of market 50^th percentile, (b) total cash compensation is within plus or minus 15% of market 50^th percentile and (c) total direct compensation is within plus or minus 20% of market 50^th percentile. Based on its pay assessment, Towers Perrin found that for 2006, relative to market 50^th percentile:

 

 

Mr. Durand’s compensation was not considered in the above analysis as he joined us after Towers Perrin conducted its competitive pay assessments.

2007 Executive Compensation Components

 

For the fiscal year ended December 31, 2007, the principal components of compensation for our named executive officers were:

 

 

Base Salary

 

A significant component of our named executive officers’ compensation is base salary, which provides our named executive officers with a degree of financial certainty and stability. In setting base salaries and determining merit increases for our named executive officers the Committee takes into account a variety of factors, including:

 

 

With regard to individual and team performance, the Committee relies to a large extent on our chief executive officer’s evaluation of each other named executive officer’s individual performance. Salary levels are typically considered annually as part of our performance review process as well as upon a promotion or other change in job responsibility. Merit based increases to salaries of our named executive officers are based on the Committee’s and the chief executive officer’s assessment of the individual’s performance and market conditions.

 

After taking into consideration (a) the factors listed above, (b) Tower Perrin’s competitive pay assessment, (c) the recommendations from our chief executive officer and (d) our acquisition of Andrx Corporation in 2006, which added approximately $1 billion to our revenues and placed us near the top end of the peer group companies used by Towers Perrin: in 2007 the Committee increased Mr. Joyce’s base salary 28%, Mr. Russillo’s base salary 9%, Mr. Heimers’ base salary 24% and Mr. Buchen’s base salary 19%. Dr. Chao’s base salary was not increased.

 

Mr. Bisaro succeeded Dr. Chao as our President and Chief Executive Officer effective September 4, 2007. Pursuant to the terms of his employment agreement we agreed to pay Mr. Bisaro an annual base salary of $1 million. Mr. Durand was appointed to the position of Senior Vice President and Chief Financial Officer on November 16, 2007. Pursuant to the terms of his employment agreement, we agreed to pay Mr. Durand an annual base salary of $450,000. The Committee approved theses amount based on market date provided by Towers Perrin, Mr. Bisaro’s and Mr. Durand’s respective salaries with their previous employers and following negotiations with Mr. Bisaro and Mr. Durand.

 

Annual Cash Incentive Awards

 

The purpose of our annual cash incentive plan is to provide cash compensation on an annual basis that is at-risk and contingent on the achievement of annual individual, departmental, business and strategic objectives. These cash incentives are intended to link a substantial portion of executive compensation to our performance and provide executive officers with a competitive level of compensation if they achieve their objectives. In

determining the annual cash incentive award due to a named executive officer the Committee examines, where applicable, three primary elements of performance:

 

 

Corporate Financial Performance.

 

In 2007, with the objective of better linking the total compensation we pay to our named executive officers to our financial performance, the Committee changed its measure of corporate financial performance from operating cash flow and gross profit to Adjusted EBITDA. “Adjusted EBITDA” means our earnings before interest, taxes, depreciation and amortization, adjusted for share-based compensation, acquisition or licensing related charges, restructuring charges, litigation charges, charges associated with our global supply chain initiative, non-cash charges, gains or losses on debt repurchase, gains or losses on sales of operating assets or securities and such other special items as determined at the discretion of our Board of Directors.

 

In determining the portion of a named executive officer’s annual incentive award attributable to financial performance the Committee used a performance grid that established minimum Adjusted EBITDA achievement necessary for 50% funding of this portion of our named executive officers’ annual incentive award, a stretch Adjusted EBITDA achievement resulting in 150% funding, and roughly linear stepped Adjusted EBITDA targets resulting in levels of funding between 50% and 150%. In 2007, Adjusted EBITDA less than $402.2 million (our actual Adjusted EBITDA for 2006) would have resulted in 0% funding of this portion of our executives’ annual cash incentive award while Adjusted EBITDA in excess of $708.8 million would have resulted in 150% funding of this portion of our executives’ annual cash incentive award. For 2007, our actual Adjusted EBITDA of $545.4 million, resulted in a 100% payout level with respect to the portion of the executives annual incentive award based on Adjusted EBITDA. In 2007, corporate financial performance as measured by Adjusted EBITDA accounted for 50% to 60% of the annual cash incentive award available to our eligible named executive officers.

 

Segment Contribution

 

The adjusted contribution to our overall corporate financial performance by our Generic, Brand and Distribution business segments is given significant weight in determining the overall cash incentive award available to members of these business segments. This weighting recognizes that each business segment has its own measures of performance and achievement that may differ from overall corporate measures or from the measures used by our other segments. The Committee believes that using these relative measures of performance is key to specifically rewarding the performance of our executives in these segments. In determining the portion of a named executive officer’s annual incentive award attributable to segment contribution the Committee uses a performance grid (similar to the performance grid used by the Committee in determining the Adjusted EBITDA portion of our annual cash incentive award) that establishes minimum, target and maximum contribution levels for each of our business segments. Achievement of target contribution levels in 2007 required performance significantly above fiscal 2006 levels. As such, the achievement of our 2007 contribution target contribution levels required sustained, high-level performance by our named executive officers in these segments. Actual adjusted contribution in 2007 resulted in a 100% payout level for our generic business segment and a 150% payout level for our brand business segment with respect to this portion of our named executive officer’s annual cash incentive award calculation. In 2007, segment contribution accounted for 50% of the annual cash incentive award available to Messrs. Russillo and Heimers.

 

Individual and Departmental Performance

 

The Committee also recognizes that individual and departmental performance are key elements to consider in determining the overall cash incentive award available to an executive. To this end, our chief executive officer reviews the performance of each of our executive officers and, with the assistance of our

human resources department, makes recommendations to the Committee concerning compensation of the named executive officers. While the Committee considers these recommendations in determining annual cash incentive awards, it may modify any such recommendations in its discretion. In 2007, individual and departmental performance accounted for 40% of the annual cash incentive award available to Messrs. Buchen and Joyce.

 

Our 2008 cash incentive award program is substantially similar to our 2007 program, but features financial targets and thresholds for Adjusted EBITDA and segment contribution based on our 2008 operating plan as approved by our Board of Directors. Meeting and exceeding these targets will require consistent and superior performance by us, each of our business segments and our named executive officers.

 

Annual Cash Incentive Awards for our Chief Executive Officer.  

 

Dr. Allen Chao.

 

In 2007 the Committee adopted a formula for determining whether to award a cash incentive award to Dr. Chao for performance during the 2007 fiscal year. The formula was not contained in a formal written plan. Pursuant to the formula Dr. Chao was eligible to receive a cash bonus of up to $1,200,000. Up to $800,000 was based upon our Adjusted EBITDA achievement in 2007 and up to $400,000 was at the discretion of the Committee, taking into account:

 

 

Based on our actual Adjusted EBITDA result for 2007 of $545.4 million, which exceeded our target Adjusted EBITDA for 100% payout, the Committee determined that a cash incentive of $800,000 would be awarded to Dr. Chao. After taking into account Dr. Chao’s success in achieving the factors discussed above, among other things, the Committee also awarded Dr. Chao a discretionary bonus of $400,000.

 

Paul Bisaro.

 

Pursuant to his employment agreement Mr. Bisaro was eligible to receive a cash bonus of up to 100% of his base salary, prorated for the portion of the year Mr. Bisaro was employed as our chief executive officer, based on our financial performance in 2007 as measured by the Adjusted EBITDA targets established at the beginning of the year. Mr. Bisaro’s target bonus opportunity was determined following negotiations with Mr. Bisaro which considered, among other things, the significant impact Mr. Bisaro would have on our ability to meet our targets and his compensation opportunities with his previous employer. The Committee also considered that the median bonus payment for the most recent fiscal year among our peer group companies was approximately 109% for chief executive officers. As a results of our actual Adjusted EBITDA results for 2007 exceeding our target for 100% funding, and Mr. Bisaro’s service from September 4, 2007 to the end of the year, the Committee determined that a cash incentive of $330,000 would be awarded to Mr. Bisaro for performance in 2007.

 

For 2008, the Committee approved a bonus program pursuant to which Mr. Bisaro will be eligible to receive a cash bonus of up to 100% of his then current salary. Up to 70% of Mr. Bisaro’s award will be based upon our financial performance in 2008 as measured by Adjusted EBITDA, and up 30% of Mr. Bisaro’s award will be at the discretion of the Committee, taking into account Mr. Bisaro’s success in:

 

 

 

The Committee may consider other relevant factors in its sole discretion. The Committee will determine whether, and to what extent a bonus will be paid to Mr. Bisaro for fiscal year 2008 after the end of 2008.

 

Annual Cash Incentive Awards for our Named Executive Officers.  

 

Each year, the Committee adopts a program that provides guidelines pursuant to which it calculates the annual cash incentive awards available to our named executive officers, other than our chief executive officer, subject to the Committee’s oversight and modification. The Committee believes that our annual incentive plan provides our named executive officers with a team incentive to both enhance our financial performance and perform at the highest level. The terms of these programs are not contained in a formal written plan.

 

Under our 2007 cash incentive program each of our named executive officers, other than our chief executive officer, was eligible to receive an annual cash bonus targeted at a specified percentage of his or her base salary. For 2007 these percentages were: 55% for Mr. Russillo; 50% for Mr. Heimers; 45% for Mr. Buchen; and 30% for Mr. Joyce. In setting our named executive officers’ target bonus opportunities, the Committee considered that the 2006 target total cash compensation levels of Messrs. Russillo, Heimers, Buchen and Joyce compared to the market 50^th percentile for their positions. Mr. Durand, who joined us on November 16, 2007, was not eligible for a cash incentive award for our 2007 performance. Pursuant to the terms of his employment agreement, Mr. Durand’s target bonus level will be not less than 50% of his base salary.

 

The bonus actually paid to each named executive officer could have ranged from 0% to 150% of the named executive officer’s target bonus, depending to varying degrees on (i) our financial performance in 2007 as measured by Adjusted EBITDA, (ii) the contribution of the named executive officer’s business segment to our performance (where applicable) and (iii) the evaluation of the named executive officer and his or her department during 2007 as determined by our chief executive officer based on the executive’s and his department’s achievements during 2007. For 2007 the above factors were applied as follows in determining the annual cash incentive award due to each of our named executive officers:

 

 

 

The calculations of the cash incentive awards and the recommendation of our chief executive officer are submitted to the Committee for consideration and approval. The total amount of cash bonus payable to a named executive officer may be further adjusted by up to twenty five percent (25%) at the discretion of the Committee. The Committee determines whether and to what extent cash incentive awards will be paid for a fiscal year after the end of that fiscal year.

 

Sign On Bonus.

 

Pursuant to his new-hire employment agreement, Mr. Durand received a $150,000 sign-on bonus of which $50,000 was paid upon the first payroll distribution date after his effective date of hire and $100,000 was paid in March 2008. We agreed to provide this benefit following negotiations with Mr. Durand taking into account, among other things, his compensation opportunities with his previous employer.

 

Long-Term Equity Incentives

 

Our named executive officers generally receive equity based grants when they join us, upon promotions and generally thereafter as part of the Committee’s determination of the executive officers’ annual total compensation on annual dates scheduled in advance. All equity awards are approved before or on the date of grant. In determining the size of equity-based grants, the Committee considers the number of shares available under the Second Amendment and Restatement of the 2001 Incentive Award Plan of Watson Pharmaceuticals, Inc. (the “Incentive Award Plan”), the potential dilutive impact of such grants, the individual’s position with us, the appropriate allocation of such grants based on individual and corporate performance, and the level of grants awarded by our peers.

 

While we do not require our employees to maintain any minimum ownership interest in our stock, the Committee believes that equity-based awards provide a valuable tool for aligning the interests of management with our stockholders and focusing management’s attention on our long-term growth. In addition, the Committee believes that equity-based awards are essential to attract and retain the talented professionals and managers needed for our continued success.

 

In accordance with our Incentive Award Plan, our long term equity incentive program is a performance based program that provides for discretionary equity awards of restricted stock, stock appreciation rights, dividend equivalents, restricted stock units, deferred stock, stock payment awards and stock options to our named executive officers. Prior to 2005, our long-term equity compensation awards generally took the form of stock option awards. During 2005 and 2006, our long-term equity compensation awards took the form of a mix of restricted stock grants and stock option awards. The Committee determined that by providing full-value shares in addition to options, the value of the grant would remain competitive while the number of shares granted could be reduced to manage our share usage. Using the Black-Scholes pricing model for stock option valuation and the market value of our common stock for restricted stock valuation, we generally targeted our restricted stock awards and stock option awards to each comprise approximately 50% of the total value of our typical long-term equity award.

 

After further considering the cost and dilutive impact of our long term equity awards, the negative effect our usage of stock options was having on the total direct compensation of our named executive officers, the marginal retention value we were achieving through our stock options and market trends relating to long-term incentive compensation, the Committee further revised our approach to long-term equity compensation in 2007. This revised approach had two key components. First, the Committee shifted our annual long-term equity awards away from a mix of options and restricted stock to restricted stock awards only. Second, the Committee split our restricted stock awards into two classes: (1) “time awards” that are based on individual and corporate performance factors and (2) “performance awards” that are based on our performance against

the same Adjusted EBITDA targets upon which our annual cash incentive compensation program is based. The Committee may, in the future, adjust this mix of award types or approve different award types as part of our overall long-term equity incentive program.

 

Restricted Stock

 

“Time Awards” — As part of our total compensation program the Committee generally grants shares of restricted stock to our named executive officers on an annual basis (the “Time Awards”). Each named executive officer is entitled to a grant of Time Award shares within a preset range that varies in accordance with the named executive officer’s position of responsibility with us. While Time Award grants are not tied to any specific financial targets, the Committee determines the specific amount of Time Awards to be granted to each named executive officer based on our performance and the Committee’s evaluation of each officer’s individual performance, taking into consideration the recommendation of our chief executive officer. In recognition of their strong performance in fiscal 2006, the Committee awarded Time Awards of restricted stock in June 2007 in the following amounts: Mr. Russillo received 15,000 restricted shares, Mr. Buchen received 7,500 restricted shares; Mr. Heimers received 5,500 restricted shares and Mr. Joyce received 3,000 restricted shares. Time Awards were not granted to Dr. Chao, Mr. Bisaro or Mr. Durand in 2007.

 

“Performance Awards” — Beginning in 2007 the Committee introduced our Senior Executive Equity Compensation Program pursuant to which each named executive officer, other than our chief executive officer, is eligible to receive an award of shares of restricted stock based on the Company’s performance during the 2007 fiscal year as measured by Adjusted EBITDA. The target for a named executive officer’s Performance Award is equal to his or her actual Time Share award granted in the fiscal year for which performance is being measured. The actual Performance Award granted by the Committee can range from 0% to 150% of each named executive officer’s target Performance Award based upon our financial performance for the fiscal year using the same Adjusted EBITDA calculation used by the Committee in determining our annual cash incentive payouts to our named executive officers. Based on our financial performance in 2007 as measured by Adjusted EBITDA, in March 2008 the Committee granted each named executive officer eligible to receive a Performance Award an award equal to his target: Mr. Russillo received 15,000 restricted shares, Mr. Buchen received 7,500 restricted shares; Mr. Heimers received 5,500 restricted shares and Mr. Joyce received 3,000 restricted shares.

 

Our restricted stock awards of Time Awards and Performance Awards generally have restrictions on resale that lapse on the second and fourth anniversaries of the grant date. On each of those dates 50% of the total award’s restrictions on resale lapse, contingent on the continued employment with us by the named executive officer. In the future, the Committee may adjust the restrictions on resale to which our restricted stock is subject. The Committee will determine whether and to what extent Performance Awards will be awarded for fiscal year 2008 after the end of 2008.

 

New Hire Awards.

 

Pursuant to their new-hire employment agreements, we agreed to grant to Messrs. Bisaro and Durand 42,600 and 10,000 shares of restricted stock, respectively. These awards have restrictions on resale that lapse (or are eliminated) on the second and fourth anniversaries of their grant date. On each of those dates 50% of the total award’s restrictions on resale lapse, contingent on the continued employment with us by the named executive officer. We agreed to grant these shares of restricted stock in order to align the interests of Mr. Bisaro and Mr. Durand with our stockholders and focus their attention on our long-term growth.

 

Stock Options

 

We award stock options with an exercise price equal to the last closing price of our common stock on the NYSE prior to the award grant, in accordance with the terms of our Incentive Award Plan. These options generally have a term of 10 years and generally are subject to a four-year ratable vesting schedule. Vesting rights cease upon termination of employment (except in the case of a qualifying termination in connection with a change-in-control, in which case vesting rights accelerate upon termination of employment) and

exercise rights generally cease ninety (90) days after the date of termination, except in the case of death (subject to a one year limitation), disability or retirement. In the case of vice-presidents who have been employed by us for more than five (5) continuous years, exercise rights cease two (2) years after the vice-president’s termination of employment for awards made on or after July 25, 2005. Prior to the exercise of an option, the holder has no rights as a stockholder with respect to the shares subject to such option, including voting rights and the right to receive dividends or dividend equivalents.

 

With the exception of our grant of 527,200 stock options to Mr. Bisaro when he joined us, we did not grant any options to named executive officers in 2007. Notwithstanding our move from granting a mix of stock options and restricted stock to granting restricted stock only as our primary means of long-term equity compensation, the Committee determined that in the circumstance of a new hire of chief executive officer, the inclusion of stock options as part of Mr. Bisaro’s new hire compensation package was appropriate and desirable to the extent the higher incentive value provided by a stock option award to increase our stock value complemented the incentive and retention value of Mr. Bisaro’s restricted stock awards.

 

We believe the term and vesting schedule of our stock options, and the vesting schedule for our restricted stock awards, provide additional incentive to management to focus on long-term growth and corporate financial performance.

 

Perquisites and Other Personal Benefits

 

We provide our named executive officers with perquisites and other personal benefits that we and the Committee believe are reasonable and consistent with our overall compensation program and better enable us to attract and retain superior employees for key positions. The Compensation Committee believes these benefits and perquisites provide a more tangible incentive than an equivalent amount of cash compensation. The Committee periodically reviews the levels of perquisites and other personal benefits provided to our named executive officers.

 

The named executive officers are provided with a monthly car allowance, financial planning assistance and participation in the plans and programs described below under the heading “Other Benefits — Generally Available Benefits.” Upon relocation, named executive officers may receive, at the discretion of the Committee, a relocation allowance paid in installments. The car allowance is intended to cover expenses related to the lease, purchase, insurance and maintenance of a vehicle. It is provided in recognition of the need to have executive officers visit customers, business partners and other stakeholders in order to fulfill their job responsibilities. The financial planning assistance covers expenses resulting from financial, estate and tax planning. We believe that it is in its best interest for the executives to have professional assistance in managing their total compensation so that they can focus their full attention on growing and managing the business.

 

Attributed costs of the personal benefits described above for the named executive officers for the fiscal year ended December 31, 2007, are included in column (i) of the “Summary Compensation Table on page 22.

 

Other Benefits

 

Generally Available Benefits

 

We provide the following benefits to our named executive officers generally on the same basis as the benefits provided to all employees:

 

 

Executive Compensation Deferral Program

 

Our named executive officers, in addition to certain other U.S.-based eligible management level employees, are entitled to participate in our Executive Deferred Compensation Plan. Pursuant to our Executive Deferred Compensation Plan, eligible employees may defer from 1% to 80% of their salary and from 1% to 80% of their annual cash incentive award, if any.

 

We match 50% of the first 2% an employee defers in accordance with this Plan. Vesting of the matched amount is based on an employee’s years of service with us. If an employee has been with us for less than one year, none of the matched amount is vested. Vesting thereafter occurs 33% per year, such that employees who have been with us for more than 3 years are 100% vested in the matched amount.

 

All contributions to our Executive Deferred Compensation Plan have a guaranteed fixed interest rate of return. This guaranteed rate is adjusted annually based on the Prime interest rate published in the Wall Street Journal on the first business day of December of each year for the upcoming plan year. In 2007 the guaranteed interest rate was 8.25%. In 2008 the guaranteed interest rate is 7.5%.

 

Our Executive Deferred Compensation Plan is discussed in further detail under the heading “Nonqualified Deferred Compensation” on page 30.

 

Severance Benefits

 

Termination of each of our named executive officer’s employment can occur at any time with or without cause, or by reason of death or disability. Additionally, each named executive officer may voluntarily resign at any time with or without good reason. Pursuant to each of our named executive officer’s respective employment agreements, in the event of termination of employment without cause, or if the named executive officer resigns for good reason, we will provide the named executive officer with severance compensation and benefits, including a lump sum severance payment (based on a multiple of the executive officer’s salary and bonus), continued group health insurance benefits for two years and outplacement services for certain periods subsequent to the executive officer’s termination. The severance benefits are designed to retain our executive officers by providing them with security in the event of a termination of employment without cause or resignation for good reason.

 

In addition to the severance benefits discussed above, if we experience a change-in-control, and if a named executive officer is terminated without cause or resigns for good reason within ninety (90) days prior to or up to twenty-four (24) months following such change-in-control, our employment agreements with our named executive officers provide for the immediate vesting of any unvested options and restricted stock held by such named executive officer. The benefits are only payable upon a double trigger — there must be a change-in-control and a termination or resignation for good reason. We believe this approach to be in our best interests in that it (1) provides a retention incentive to our named executive officers who may be faced with the potential of job loss following a change-in-control and (2) affords any successor entity the opportunity to retain any or all named executive officers following such a change-in-control.

 

Each named executive officer is also entitled to receive a gross-up payment to compensate for any excise tax imposed on the named executive officer under the Internal Revenue Code. Additional information regarding applicable payments and benefits provided under our agreements to our named executive officers is provided under the heading “Potential Payments Upon Termination or Change-in-Control” on page 31.

 

Tax and Accounting Considerations

 

Policy on Deductibility of Executive Compensation

 

Section 162(m) of the Internal Revenue Code provides a $1,000,000 deduction limit on compensation paid to the reporting executives of publicly held corporations, unless the compensation qualifies as “performance based” compensation based on certain performance, disclosure, stockholder approval and other requirements being met. The options granted under the Incentive Award Plan generally comply with these performance-based compensation requirements. We have not historically designed our long-term equity

incentives and our annual cash incentive award programs to comply with the performance-based compensation requirements.

 

We periodically review the potential consequences of Section 162(m) and may structure the performance-based portion of our executive compensation to comply with certain exemptions of Section 162(m). However, we reserve the right to use our judgment to authorize compensation payments that do not comply with the exemptions of Section 162(m) when we believe that such payments are appropriate and in the best interests of our stockholders.

 

Nonqualified Deferred Compensation

 

Section 409A of the Internal Revenue Code requires that “nonqualified deferred compensation” be deferred and paid under plans or arrangements that satisfy the requirements of the statute with respect to the timing of deferral elections, timing of payments and certain other matters. Failure to satisfy these requirements can expose employees and other service providers to accelerated income tax liabilities and penalty taxes and interest on their vested compensation under such plans. Accordingly, as a general matter, it is our intention to design and administer our compensation and benefits plans and arrangements for all of our employees and other service providers, including the named executive officers, so that they are either exempt from, or satisfy the requirements of, Section 409A. With respect to our compensation and benefit plans that are subject to Section 409A, in accordance Section 409A and regulatory guidance issued by the IRS, we are currently operating such plans in compliance with Section 409A based upon our good faith, reasonable interpretation of the statute and the IRS’s regulatory guidance.

 

Change-in-Control Tax Gross-Ups

 

Sections 280G and 4999 of the Internal Revenue Code impose certain adverse tax consequences on compensation treated as excess parachute payments. An executive is treated as having received excess parachute payments if he receives compensatory payments or benefits that are contingent on a change in control, and the aggregate amount of such payments and benefits equal or exceeds three times the executive’s base amount. The portion of the payments and benefits in excess of one times base amount are treated as excess parachute payments and are subject to a 20% excise tax, in addition to any applicable federal income and employment taxes. Also, our compensation deduction in respect of the executive’s excess parachute payments is disallowed. If we were to be subject to a change-in-control, certain amounts received by our executives (for example, amounts attributable to the accelerated vesting of stock options) could be excess parachute payments under Sections 280G and 4999 of the Internal Revenue Code. As discussed above under “Potential Payments Upon Termination or Change-in-Control,” we provide our executive officers with tax gross up payments in event of a change-in-control.

 

Accounting for Share-Based Compensation

 

Beginning on January 1, 2006, we began accounting for our share-based payments in accordance with the requirements of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004).

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee of Watson has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement and our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

 

THE COMPENSATION COMMITTEE

 

Ronald R. Taylor, Chairman
Catherine M. Klema
Fred G. Weiss

 

SUMMARY COMPENSATION TABLE

 

The following table sets forth certain information regarding the annual and long-term compensation for services rendered to the Company in all capacities for the fiscal year ended December 31, 2007 of those persons who were, at any time during the year, (i) the principal executive officer, (ii) the principal financial officer, and (iii) the three most highly compensated executive officers other than the principal executive officer and principal financial officer (each, a “Named Executive Officer” and collectively, the “Named Executive Officers”). For purposes of determining the three most highly compensated executive officers, the amounts shown in column (g) below were excluded.

 

 

 

 

 

 

 

GRANTS OF PLAN-BASED AWARDS

 

The following table provides information about equity and non-equity awards granted to Named Executive Officers for 2007:

 

 

 

 

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

 

The following table sets forth the outstanding equity awards for the Company’s named executive officers at December 31, 2007:

 

 

 

 

 

 

 

OPTIONS EXERCISES AND STOCK VESTED

 

The following table sets forth certain information with respect to each Named Executive Officer concerning the exercise of option awards and the vesting of stock awards, as applicable, during the fiscal year ended December 31, 2007:

 

 

 

 

NONQUALIFIED DEFERRED COMPENSATION

 

The following table sets forth the executive contributions, employer matches, earnings, withdrawals/distributions and account balances, where applicable, for the named executive officers in the Executive Deferred Compensation Plan, an unfunded, unsecured deferred compensation plan.

 

 

 

 

 

Potential Payments Upon Termination or Change-in-Control

 

Executive Severance and Change in Control Agreements

 

Each of our named executive officers is party to an employment agreement pursuant to which he is entitled to certain payments and benefits in the event of (i) an involuntary termination without cause, (ii) the resignation of the executive for good reason or (iii) a qualifying termination in connection with a change-in-control. With certain exceptions footnoted in the table that follows, these agreements generally provide that under these circumstances our named executive officers are entitled to receive:

 

(1) lump sum cash payments equal to the sum of (a) 24 months of the executive’s then base salary, (b) the greater of two times the executive’s target bonus to be earned in the year in which the termination occurs or two times the amount of the bonus paid to the executive in the prior year, and (c) the executive’s prorated bonus for the year in which the termination occurs;

 

(2) continued group health benefits (medical, dental and vision) for the executive and the executive’s dependents for a period of up to 24 months; and

 

(3) outplacement services for one year with a nationally recognized service selected by us.

 

Unless we determine that any severance payments should be delayed in consideration of Section 409A of the Internal Revise Code of 1986, cash payments are to be paid within 30 days of termination.

 

Change-in-Control

 

In the event of a “qualifying termination” in connection with a change-in-control, a named executive officer is entitled to accelerated vesting with respect to all of his options and restricted stock awards. Such executive is entitled to exercise any vested options and is entitled to continue to hold their shares of unrestricted stock after termination. The value of vested equity awards are not included in the tables below because all employees who hold vested stock options and unrestricted stock under our stock plans are entitled to exercise such options and continue to hold such stock upon termination of their employment. However, in the event of a qualifying termination in connection with a change-in-control, each named executive officer is entitled to accelerated vesting with respect to all of his options and restricted stock awards.

Change-in-Control Gross Up Payment.

 

Pursuant to their respective employment agreements, each of our named executive officers is also entitled to receive a gross-up payment to compensate him for any excise taxes payable with respect to the payments and benefits made under his employment agreement in the event of a qualifying termination in connection with a change-in-control.

 

Forfeiture of Severance Benefits.

 

If the named executive officer breaches the non-solicitation provision of his employment agreement, or violates certain other confidentiality agreements entered into with us, and fails to cure such violation within 10 business days written notice from us, then any severance payments or other benefits being provided to such named executive officer will immediately cease.

 

Estimated Termination Payments

 

In accordance with the requirements of the rules of the SEC, the table below indicates the amount of compensation payable by us to each named executive officer upon (i) resignation for “good reason,” or involuntary not-for-cause termination and (ii) a qualifying termination following a change-in-control. The amounts assume that such termination was effective as of December 31, 2007 and thus includes amounts earned through such date and are only estimates of the amounts that would actually be paid to such executives upon their termination. The definitions of “change-in-control,” “cause” and “good reason” and descriptions of the payments and benefits appear after the table.

 

The table does not include certain amounts that the named executive officer is entitled to receive under certain plans or arrangements that do not discriminate in scope, terms or operation, in favor of our named executive officers and that are generally available to all salaried employees, such as payment of accrued vacation. The table also does not include the accrued and vested accounts of the executive under our deferred compensation plan. These amounts are generally distributed to our executives upon a termination of employment, regardless of the reason, in accordance with his or her election under the applicable plan. The accrued and vested amounts under the plan are set forth in the table under “Nonqualified Deferred Compensation” on page 30.